Official Gazette, 2000, No. 19-487
Effective as of 04 March 2000
COMPETITION COUNCIL OF THE REPUBLIC OF LITHUANIA
24 February 2000, No. 17
CONCERNING EXPLANATIONS OF THE COMPETITION COUNCIL ON THE DEFINITION OF THE RELEVANT MARKET
The Competition Council of the Republic of Lithuania, acting in accordance with Article 19(1)(2) of the Law on Competition of the Republic of Lithuania and seeking the harmonisation of the law of the Republic of Lithuania and the European Communities governing competition relations, having regard to the Commission Notice “On the definition of the relevant market for the purposes of Community competition law” (97/C 372/03), the competition law of other States and the accumulated practice in the application of the Law on Competition of the Republic of Lithuania has resolved:
Approve the explanations of the Competition Council on the definition of the relevant market (attached).
CHAIRMAN R. STANIKŪNAS
by Resolution No. 17 of 24 February 2000
of the Competition Council of the Republic of Lithuania
EXPLANATIONS OF THE COMPETITION COUNCIL CONCERNING THE DEFINITION OF THE RELEVANT MARKET
- The purpose of the explanations of the Competition Council concerning the definition of the relevant market (further - the Explanations) is to provide for the key principles and criteria underlying the definition of the relevant market by the Competition Council for the purpose of the application of the Law on Competition of the Republic of Lithuania (further - the Law on Competition), including the legal norms regulating prohibited agreements, abuse of a dominant position and concentration control.
These Explanations have been designed to facilitate undertakings to get an understanding of what information is considered relevant by the Competition Council for the purpose of definition of the relevant market. Frequently such information is a decisive factor for the assessment of a specific restrictive case. The present Explanations have been intended to contribute to the clearness and transparency of decisions of the Competition Council.
The Explanations may be used for guidance purposes by undertakings when defining the market and establishing of their market share.
- The Competition Council explains the concepts of the relevant market set forth in Article 3 of the Law on Competition in accordance with principles and criteria laid down below. They have been drafted on the basis of the Commission Notice "On the definition of the relevant market for the purposes of Community competition law " (97/C 372/03), also having regard to the competition law and practice of other States and the accumulated experience in the application of the Law on Competition of the Republic of Lithuania.
- Article 3 of the Law on Competition provides for the following definition of the relevant market:
“Relevant market” means the market of certain goods in a relevant geographic territory.
“Product market” means the aggregate of goods, which from the consumers’ point of view are appropriate substitutes according to their characteristics, application and prices.
“Geographic territory (geographic market)” means the territory in which the conditions of competition in a relevant product market are in essence similar to all undertakings and which, taking into consideration said fact, may be distinguished from adjacent territories.
“Conditions of competition” means various economic parameters of purchase or sale, the most important thereof being prices, discounts and mark-ups or other payments as well as factors affecting them (legal restrictions of economic activity, aid granted by public and local authorities, production technologies and costs, peculiarities of the use and consumption of goods, transportation possibilities, etc.).
- Other concepts used for the purpose of the present document:
Supplier means an undertaking that sells or resells the goods.
Buyer means a person that purchases the goods for reselling or the use thereof in other ways (consumption).
Competitive factors mean factors preventing the freedom of an undertaking to behave independently in the market, such as demand (buyer) substitutability, supply (supplier) substitutability, potential competition.
Secondary product means a supplement to a primary product used only with the primary product. For example, spare parts of a vehicle shall be a secondary product where the vehicle is considered a primary product.
Substitution chain shall mean a case when two products (areas) are not substitutable, but each may be substituted by a third product (area). The substitution chain may be made up of more than three products (areas).
Product demand elasticity means a ratio between the percentage change of the product demand and the percentage change of a product price.
Cross-price elasticity for the demand of a product means a ratio between the percentage change of the product demand and the percentage change of another product price.
- The main purpose of the definition of the relevant market is to establish the competitors of the undertakings under consideration that are capable of constraining the freedom of those undertakings to behave independently of other market participants. The undertakings for the purpose of this document are as follows: in case of concentration - undertakings participating in the concentration, in case of agreements - parties to the agreement, and in case of abuse of a dominant position - the undertaking concerned.
- The definition of the relevant market covers several stages. First, the product market is defined by identifying the products that are or may be substitutable. Next, the geographical market shall be defined by defining the area wherein such substitution is or may be taking place. Both for the purpose of defining the product market and that of defining the geographical market the demand substitution shall be analysed in the first place (the possibility of the buyer to substitute one product for another or purchase the product in another area), further - the supply substitution (the possibility of suppliers to start supplying relevant products or start supplying them from another areas)*.
Following the definition of the relevant market, the market participants shall be identified and the market shares held thereby assessed.
CRITERIA FOR THE DEFINITION OF THE RELEVANT MARKET
- Demand substitution is immediate and the most effective competitive factor restricting the supplier’s behaviour in the market. Single undertaking or several undertakings cannot have a significant impact on the prevailing prices and other sale conditions, if its customers can switch easily to available substitutes or to suppliers located elsewhere. Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings considered, in terms both of products and of geographic areas.
Supply substitution and potential competition also affects the behaviour of the supplier in the market, although with some time lag. These factors require individual analysis. When defining the relevant market the latter competitive factors are normally not taken into account, except for the cases referred to in items 10-11. The impact produced by these factors shall be considered in subsequent stages of competition analysis, - when establishing the market entry possibilities for potential competitors (see the Explanations of the Competition Council concerning the establishment of a dominant position).
- The assessment of demand substitution entails a determination of products, which are viewed as substitutes by the consumer by their characteristics, the use and the prices. This is performed by evaluating the likely reaction of customers to a small, permanent relative price increase (i.e., price increase in the products concerned deeming that the prices of other products remain unchanged). This permanent increase means that the increase considered hereunder is not an instant or temporary price increase, but rather a permanent increase that will last for a considerable period of time in the future.
For the purpose of the application of this method the first factors to consider are the products marketed by the undertakings considered and the area wherein they market such products. The question to be answered is whether the parties' customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (e.g., in the range 5 % to 10 %, figures chosen for guidance, not as a firm rule) but permanent relative price increase in the products concerned in the relevant areas. If substitution were enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market. The limits of the relevant market shall be expanded until the demand is completely impossible or so insignificant that small permanent price increase in the products considered over the existing level would be profitable.
- A practical example of this method can be provided by its application to the investigation on the belonging of two different products to the same market. Where a significant number of consumers when confronted with a permanent price increase in the product A by 10 - 15 % would switch to the product B, and as a result the price increase for the product A would not be profitable to the seller, we could conclude that the market under consideration is comprised of the products A and B. The process would have to be extended to other available substitutes of the products until a set of products is identified for which a price rise would not induce a sufficient substitution in demand.
- For the purpose of the definition of the relevant market the Competition Council shall also take into account the supply substitutability, where its effects are equally efficient and immediate as that of the demand substitution. This means that in response to a small, permanent price increase in products concerned the other suppliers are able to start supplying the relevant products in short period (this is such a period during which the undertaking can not substantially adjust existing tangible and intangible assets) without incurring significant additional costs or risk. The additional production put on the market will have an effect on the competitive behaviour of the undertakings concerned.
- This is normally applicable in cases when undertakings market a wide range of qualities or kinds of the same product. Even if for some groups of buyers or consumers products of different quality or kind are not substitutes, they may be attributed to one product market, provided that most of the suppliers are able to offer and sell the various qualities and kinds of the products immediately and without the significant increases in costs. In such cases the relevant product market will encompass all products that are substitutable in demand and supply.
The same principles may be applied when grouping different geographical areas.
- In the event the Competition Council establishes that the response to the price changes would require significant reformation of the tangible or intangible assets, additional investment, passing of strategic decisions or would last a significant time period (for example, more than a year), this substitutability will be treated by the Competition Council as potential competition and will not be taken into account thereby when defining the relevant market.
- When defining the market the Competition Council will not take into account potential competition. The particular factors related to the conditions of entry are decisive for the possibility of potential competition to become an effective competitive constraint (see the Explanations of the Competition Council concerning the establishment of a dominant position). If required, such analysis can be carried out at a subsequent stage, once the position of the undertaking in the relevant market has been ascertained, and where such position gives rise to concerns from a competition point of view.
EVIDENCE RELIED ON TO DEFINE RELEVANT MARKET
- In defining the relevant market the Competition Council will normally require the principal consumers and sellers of the product concerned to provide factual information, which in the opinion of the Competition Council is necessary to arrive at a conclusion concerning the size of the relevant market. In addition, the Competition Council may inquire the opinion of the above market participants on the limits of the relevant market, by asking on their possible response to a small, permanent relative price increase.
The Competition Council may also require information from the relevant associations of the undertakings concerned and undertakings operating in upstream markets (production resources, etc.), where needed for the definition of the product and geographical market in respect of different levels of the production and distribution of the product concerned.
- In order to acquire a better understanding of the nature of production and sale of the products, visits may be made to the undertakings concerned, their customers and competitors.
- There is a range of evidence possibly used by the Competition Council for the assessment of the extent to which substitution would take place. Depending on the economic sector being examined, certain evidence of qualities and characteristics of products may be determinant or, conversely, insignificant. The Competition Council will use all information available to it that may be relevant for a specific case. Most frequently the definition of the market shall be based on several criteria and evidence of different types, without following a rigid hierarchy of different sources of information or types of evidence.
- The process of defining the relevant markets may be summarised as follows: on the basis of the preliminary information available or information submitted by the undertakings involved, the Competition Council will broadly define relevant markets within which the competitive concern may be examined, such as concentration or restriction of competition. The question will usually be to decide on a few alternative possible relevant markets. Where the product market is defined with a purpose of defining whether the products A and B belong to the same product market, it is often the case that the inclusion of product B would be enough to remove any competition concerns.
In cases when the operation of the undertaking examined does not raise competition concerns in possible relevant markets, it shall not be necessary to examine whether the market encompasses other products and strive to precisely define the relevant market.
- Seeking to limit the scope of investigation of possible substitutes, the characteristics and intended use of the product shall be analysed. These characteristics are not sufficient, however, to decide whether the two products are demand substitutes, since the response of the buyers to the relative price change may be caused by other reasons apart from functional substitutability or similarity of characteristic. On the other hand, the differences in product characteristics are not sufficient to negate the demand substitutability, since this is highly dependant on how consumers value different characteristics.
- Evidence that the Competition Council considers relevant for the assessment of substitutability of two products:
- Evidence of substitution in the recent past. In certain cases it is possible to obtain evidence relating to recent past events and changes in the market showing the substitutability of the two products. Market definition essentially may be based on such information. The relative changes in prices in the past and response to such changes in terms of changes in the demand scope, shall be the determinant factor for establishing the substitutability, provided other conditions did not change or changed negligently. The appearance of new products in the past may also provide some useful information provided it is possible to establish exactly the sale of which products was reduced due to the appearance of the new products.
- Quantity tests. Estimates of elasticity and cross-price elasticity for the demand of a product and the analysis of the pattern of price change within a certain period of time may be treated as evidence of product substitutability provided the tests are conducted employing the recognised econometric and statistical approaches. The Competition Council shall take into account the available material quantity evidence facilitating the establishment of the nature of substitutability in the past.
- Views of customers and competitors. An important source of information may also be the principal customers and competitors of the undertakings examined, their opinion and the factual information about the boundaries of the product market. Reasoned opinion of customers and competitors as to what would happen if prices of the product in question were to increase in the geographic area involved by a small amount (for instance by 5 % to 10 %) are taken into account when they are sufficiently backed by factual evidence.
- Consumer preferences. To establish whether an economically significant proportion of consumers consider two products as substitutable, recourse may be made of the marketing studies that companies have commissioned in the past for pricing or marketing purposes, information in possession of retailers on the purchase of the products, also Consumer surveys on their attitudes concerning the use of individual products and the company name or brand name are taken into account. Where the parties concerned or their competitors conduct opinion surveys specifically for the purpose of the application of the Law on Competition presenting the findings thereof as evidence, the Competition Council shall scrutinise the methods of such surveys.
- Barriers and costs associated with switching demand to potential substitutes. Two products prima facie considered demand substitutes may not be grouped into one market in the presence of barriers to their substitution. The substitution may be impeded by State regulation or other forms of State intervention, constraints arising in downstream markets (distribution, etc.), possible loss in current output in order to switch to alternative inputs (raw materials or materials, etc.), the location of customers, specific investment in production process or human capital investment, retooling costs, uncertainty about quality and reputation of unknown suppliers, and others.
- Different categories of customers and price discrimination. In individual cases the Competition Council may decide to define the relevant product market in a narrower way in the presence of individual customers’ group subject to price discrimination where the same product is being sold to them at different prices. This is normally the case when two conditions are met: (a) it is possible to identify clearly which group an individual customer belongs to at the moment of selling the relevant product to him, (b) the buyer of the product or third persons cannot resell the product.
- The process of the definition of the geographic market may be summarised as follows: on the basis of the preliminary available information on the distribution of sale volumes between the undertakings examined and their competitors, differences in prices and pricing in different areas the Competition Council shall roughly define a relatively small geographic area in which the undertakings examined operate. Then an attempt shall be made to establish whether the customers would switch to other areas as a response to a small permanent increase in the prices in their own geographic area. Where the substitution is significant to the extent that the price rise would be unprofitable for the undertakings, the neighbouring areas would be included into the geographic market. The competitive conditions in such substitutable areas are to a large extent similar.
- Evidence of demand substitution constituting a basis for the definition of the geographic market (see item 24 below) are very similar to the evidence used to define the product market, although in case of the geographic market the price of the product is a much more significant factor. The higher the price of the product the more likely the customers will travel further looking for less expensive substitutes. Another factor to be taken into account is the mobility of customers.
- If necessary, a further check of the increase in supply factors will be carried out to ensure that those undertakings located in different areas do not face impediments in developing their sales on competitive terms throughout the whole geographic market. The following factors shall be examined: the need to operate own branches or similar, seeking to sell in the area; the possibility to gain access to distribution channels; costs associated with setting up a distribution network; the presence of regulatory barriers arising from public procurement, price regulation, quotas and tariffs limiting trade or production, technical standards, exclusive or special rights, freedom of establishment, requirements of administrative authorisations, packaging regulations, etc. In short, the Competition Council shall identify possible obstacles and barriers isolating companies located in a given area from the competitive pressure of undertakings located outside that area.
- The analysis of the actual trade flows (patterns of shipment) and the development thereof facilitates the assessment of the economic significance of the above-referred demand and supply substitution and the degree to which those factors may constitute actual obstacles separating the geographic markets. Additional examination may be conducted of transport costs and the extent to which these may hinder trade between different areas, having regard to geographic location of the undertakings, costs of production and relative price levels.
- The evidence the Competition Council considers relevant to reach a conclusion on the geographic market shall be the following:
- Evidence on purchases (orders, contracts) performed in the other area in the recent past. These may be the evidence on the price changes in different areas and the reaction of the buyers to such changes. The same quantity tests applied in the definition of the product market may as well be used for the definition of the geographic market.
- Principal characteristics of demand. The nature of demand for the relevant product may in itself determine the scope of the geographic market. Factors such as national preferences or preferences for national brands, language, culture and life-style have a strong potential to limit the geographic scope of competition.
- Views of customers and competitors. Where appropriate, the opinion of the principal customers and competitors of the undertakings concerned on the boundaries of the geographic markets shall be obtained which shall be significant provided it its supported by factual material, necessary to reach a conclusion on the scope of the market.
- Current geographic pattern of purchases. When customers purchase from undertakings operating under comparable trade conditions anywhere in Lithuania or they procure through tendering procedures in which undertakings from anywhere in Lithuania submit their bids usually the geographic market will be by the Competition Council considered the entire territory of the Republic of Lithuania. The significant imports of the product concerned may serve as an evidence that the geographic market is wider than the territory of the Republic of Lithuania.
- Trade flows (patterns of shipment). When the number of customers is so large that it is impossible to define the geographic pattern of purchases, the statistical information on trade flows may be used provided such statistics are available with a sufficient detail for the relevant product. The trade flows, and the rationale behind the trade flows provide useful information, but are not in themselves conclusive in the definition of the scope of the geographic market.
- Barriers and switching costs associated to divert orders to companies located in other areas. The absence of trans-border purchases or trade flows does not necessarily mean that the market is national, i.e., encompasses the territory of Lithuania only. Barriers isolating the national market have to be identified before it is concluded that the relevant geographic market is national. One of the clearest obstacles impeding purchases from other areas is the impact of transport costs and transport restrictions arising from legislation or from the nature of the relevant products. Transport costs will usually limit the scope of the geographic market for bulky, low-value products, bearing in mind that a transport disadvantage might also be compensated by a comparative advantage in other costs (labour costs or raw materials). Other barriers isolating the geographic territory shall include the difficulties in arranging the distribution system in a defined territory, State regulation of certain specific sectors, quotas and custom tariffs, also costs related to switching of orders to other territories.
- On the basis of the evidence gathered the geographic market shall be defined as local market, national market or even wider market encompassing foreign countries.
- The paragraphs above describe the different factors, which might be relevant to define the geographic market. This does not imply that in each individual case it will be necessary to obtain evidence and assess each of these factors. In order to reasonably define the geographic market often it is sufficient to have some evidence.
- The Competition Council shall apply the above principles of the definition of the relevant market taking into account the circumstances related to a specific case. For example, when examining the primary and secondary products (spare parts, etc.,) not only the response of the customers to the relative price changes is important, but also the restrictions of substitution resulting from the mutual inter-relations of the markets. A separate market in respect of the secondary products may be defined where it is important that the secondary product is compatible with the primary product. Where the primary product is expensive or of long-use and it is sufficiently complicated to find the secondary product compatible with the primary product, it may be a case that the relative increase of the secondary product price will be profitable. And conversely, the market may be defined in a different way in the presence of a sufficient number of substitutes of secondary product or the primary product is such that the customers may immediately and directly react to the change in the price of the secondary product.
- In certain cases the Competition Council shall define the relevant market to the effect that one market encompasses the products and areas not directly interchangeable, where such products or areas are interrelated by a certain substitution chain. For example, where the product transportation costs are substantial, the delivery is limited to a certain area around each supplier, then, in principal, such an area could constitute the relevant geographic market. However, if the distribution of suppliers is such that there are considerable overlaps between the areas around each supplier, it is possible that the pricing of those products will be constrained by a chain substitution effect, and lead to the definition of a broader geographic market.
The same reasoning may apply if product B is a substitute for products A and C. Even if the products A and C are not direct substitutes, they might be found to belong to the same relevant product market since their respective pricing might be constrained by substitution to product B.
In order to extent the relevant market in an individual case the chain of substitution must be supported by factual data such as price interdependence in the chain of substitution.
- It may also be the case that the Competition Council (of other competition authority in the European Union or other States) has already defined the relevant market in comparable surveys. The Competition Council may make use of such information, however, it shall take account into appropriate differences in the competitive conditions, the competitive issue under examination also to the fact that the conditions of competition may have changed in the course of time.
CALCULATION OF MARKET SHARE
- The definition of the relevant market allows to identify the suppliers active in the market, and the buyers (customers). On that basis, a total market size and market shares for each supplier can be calculated on the basis of their sales of the relevant product in the relevant market. In some cases, the data on total market size and market shares can be available from undertakings’ estimates, studies commissioned from industry consultants, experts, trade associations, etc. When this is not the case, or when available estimates are not reliable the Competition Council will ask each supplier to provide its own sales in the relevant market in order to calculate market shares.
- In calculation of the market shares the Competition Council will base itself on the sales data. In individual cases, depending on the particularity of industry or products under consideration, useful information may be derived from other indicators, such as the number of players in bidding markets where the procurement is made by bidding procedures. Where several undertakings regularly participate in the biddings and as participants of the bidding they are equivalent (equal), they may be attributed equal market shares.
- Useful information may be derived from the data on sales volumes in terms of the value and physical units. When sufficiently homogeneous products are being examined (such as metals or agricultural products), the Competition Council shall calculate the relevant market on the basis of sales volumes in physical units. Where the products examined are heterogeneous (for example, most consumer goods), the market shares shall better be calculated on the basis of sales value, since this indicators more efficiently reflect the relative position and power of each supplier.
- The Competition Council shall calculate the market shares in respect of each supplier in the geographic market.
Where the market is national market, imports may nevertheless cover a substantial share of the market. Where possible, the Competition Council shall calculate the market shares in respect of each importer rather than treat them all as a single competitor.
*Analogical analysis is applicable and in the case of the definition of the purchase market, when the undertaking under consideration is not a supplier, but a purchaser of products (e.c. purchase the milk from farmers and other suppliers, etc). However in such case respectively are examined instead of purchaser - the supplier, instead of purchases - supplies, instead of supplies - purchases, and instead of prices increase - reduction of prices.